Monday, August 17, 2009

The Health Care Rebate

by Larry Mongoss, guest blogger

This is not a particularly China related topic, though it does reflect on the public versus private view that is one of the big disconnects between China’s government and its Western critics. Now that China has started to try some sort of insurance system for its public health care, Chinese people may find themselves on the other side of that divide. Perhaps there are some lessons from the US experience they can apply.

To the point is the ongoing bickering, arguing and fighting about health care reform that is going on in Washington and around the country. To call it a debate would be elevating it above its current station. Since most the arguments seem to be recycled I have decided to call it a “rebate,” though anyone hoping to get something back is likely to be disappointed.

As I see it, there are three basic things at issue in health care: who has access to it; how much do we spend on it; and how well does it work. The crisis in health care that many people are pointing to is a result of the reality that many people do not have access, we spend a lot, and by objective public health measures the system does not work very well. So what do we do to fix it?

Clearly we give more people access, we spend less, and we get better results. Public policy is so straightforward.

Politicians, unfortunately, seem to have pretty short attention spans and it appears they have gotten themselves completely stuck on the issue of coverage and simply want to argue about how much that will or will not fail to decrease costs and ignore the final question altogether. Worse, hampered by narrow vision, reelection worries, special interest groups and lobbyists, the only viable solution for expanding coverage seems to be a new “insurance company.” Thus the debate on what it will do to costs.

What exactly is required to lower the cost of healthcare?

I have heard people say increase competition in the insurance industry. Bush 43 used to like to talk about getting rid of malpractice law suits. More thoughtful conversations do look at lifestyle, nutrition and the ratio of general practitioners to specialists. But I have never heard anyone say that we need to have fewer doctors.

This is what confuses me. If we are going to decrease the cost of health care, does not that mean exactly that – we need to lower the number of doctors, nurses, hospitals, researchers and (of course) insurance workers. If we really like to have lots and lots of these people around I guess we could just pay them less, but somehow I don’t think that will work. More people means more money, fewer people means less money.

For those of you who want to simply take it all out of corporate profits, there is a legitimate argument to be made there. The United States does, to some extent, subsidize the rest of the world in pharmaceuticals by paying much higher prices for prescription drugs than most of the rest of the world. But that, like malpractice costs and insurance inefficiencies, is not enough to turn the tide.

As a society we need to make some serious choices going forward. It would be great if everyone in America was a doctor. But where would we shop, and who would grow our food? We won’t be able to import that because, frankly, as good as the doctors are in America they are also expensive. People in other countries are very price conscious, and only the very richest of them will come to America for treatment.

Market forces will eventually take care of this, by making it very unattractive to be in the health care industry in America. When this happens it will be seen as a terrible thing and the politicians will try to reverse the trend. If the current thinking on Capitol Hill persists I expect we will see this day sooner rather than later.

We need to add price consciousness to health care to our list of imports from China and other developing nations. The current employer-based insurance schemes and the extensions of that scheme under discussion will not do this. Health care, like any service, can’t be provided in unlimited quantities. It has to be rationed, either by price or by another mechanism. Until everyone recognizes that, and we are willing to actually talk about the hard choices, there will be little fruitful discussion.

Thanks for the comment Charlie. Pick any two and just hope the third somehow works itself out. Actually there is nothing wrong with that approach, if people simply acknowledge the overall arch of what they are up to.

Anonymous, thanks for the note. Like I say, I would love everyone to be a doctor. Right now health care spending as a fraction of GDP is pushing toward $1 in $5. If you think that needs to be a bigger number we are simply back to what Good Ole Charlie said - pick something else that you don't want so much of. That is a legitimate area for disagreement.

Anon, I wonder if you always tell others to shut up when there's a different opinion. That's not the best way to participate in a discussion. Larry does have a legitimate point if you read his post carefully. He's an economist, by the way.

Sorry to offend anyone. I do not ask anyone to shut up…I merely give a suggestion that you might not know what you are talking about and appear to be ignorant. I do not know the author is an economist. But it makes no difference to my argument.

On topic. I believe that increasing coverage could lower costs. This is the basic idea of insurance. A large population shares the risk of a few. Then the cost becomes acceptable to individuals. That is why the group insurance policy has a lower price than the price of the policy for an individual. Currently the insured population bears the cost of the uninsured population. Thus, the insured population pays a higher premium and the uninsured needs to save/borrow a lot to prepare. By the way, this is what is happening in China to some extent now. So if there were universal coverage, the average premium would be lower than now, even if nothing happens to the medical cost. Cheap here means the lower premium. And this is a static comparison.

But it might not solve the problem of the high growth rate of medical cost over time. This is where the issue of number of doctors comes in. It not only needs to look at the cost structure of the healthcare providers (doctors, drug companies, medical device producers, hospitals…), but also look at the cost structure down the supply chain (medial schools, medical researchers, regulators, investors, materials…). I do not know all of them. But for starter, medical schools obviously set too high a barrier for entry admission and effectively ration the number of doctors supplied and increase the cost to produce doctors. Basically, it should be make it more competitive at every level of supply chain to reduce the consumer price. This is how most other markets work. Healthcare market has its unique factors, but it can be move toward this direction closer.

And the debate of the policy is another matter, which depends more on politics than on economics.

It appears to me that you may also be caught in the trap of viewing public policy from a personal perspective. Your argument on insurance does not really hold together if you think through the steps involved. Insuring people involves some overhead, and the uninsured are currently not consuming any of that overhead. So, while it does seem theoretically possible that the average cost may go down, the total amount of money paid to insurers will certainly go up. Of course, if you are advocating a single payer system that conclusion is not so obvious.

There is a more coherent argument, the old ounce of prevention and pound of cure adage. In short, the total cost of care could decrease as more people seek routine care and therefore fewer require the more expensive actute care. The optimist in me firmly wants to believe that, but the skeptic in me is pretty doubtful.

Still, you are right about one thing, the ongoing debate is not genuinely based on economics or common sense.

more doctors drive up accessory expenditure(6X doctor's renumeration). It is better doctors and reforming the medical-legal system (defensive medicine) that would bring about significant benefit.

the world bearing the cost of drugs, Haha, no, the marginal cost for more production is quite small. The rest of the world is subsidizing US corporate profit when bonuses reach millions of dollars. it would carry more meaningful strength if the economist would concentrate on what his/her expertise is.

Thanks for the note. Better doctors would, of course, be a good thing. However, what you call accessory expenditure is carried out by a variety of people a great number of whom have MDs or PhD (doctors of a different kind). I am not sure what you mean by defensive medicine, but if you are advocating a focus on well being rather than remedial health care I tend to agree with you.

Your comment on pharmacueticals is also curious. The vast majority of cost on most modern drugs is fixed and comes out of research and development. Marginal production costs are not really very germaine, though it is true that many people seem to want to focus on them.